It’s not the information, it’s what you DO with the information that matters

Rob Day: August 25, 2010, 10:01 AM

Now that energy efficiency is all the rage in cleantech venture circles (note to cleantech VCs: don't pitch LPs on your firm being "differentiated" because you target capital efficient businesses...), investors have been particularly attracted to the energy efficiency plays that appear to be at the intersection of energy efficiency and information technology. The hope being that these investments would scale like an IT play, but be accessing the large market opportunity in energy efficiency.

The majority of such investments I get approached on, however, are simply information gathering and presentation tools. A dashboard, either for the home or for a larger building, showing the user how much energy is being used and at what cost. The idea being that the user, armed with the information, will better manage their energy use and generate savings that pay for the information tool and then some.

There's plenty of evidence that this does work. I've talked with everyone from homeowners to big real estate managers who have used such systems and recommend them to their peers. There's some body of studies which show that such information does result in real energy savings, on average. But not much. O-Power, for example, talks about 3.5% savings. Not knocking that -- aggregated, that adds up to a nice amount of saved energy.

But the problem for investors is that each customer is only willing to spend a very little amount to get those meager savings. Aggregated, it might be a big deal. But for each individual customer, even for large buildings, it's just not that much. Alex Taussig has a nice recent post which includes some useful stats on typical office buildings, where he calculates that a 15,000 square foot US office building would on average spend around $30k per year on electricity. That's a pretty small building, even if it's "typical", so let's look at the per square foot average electricity spend as around $1/yr. So for a 20 story, 400k sqft downtown office building you're looking at around $400k per year in electricity spending. Applying that O-Power metric of 3.5% savings means an annual savings of only $14k. For a very large building -- that same building would consume about the same electricity as over 500 homes.

And how much of that $14k can an information services provider capture from that customer? Probably well less than half. So the vendor has to put a lot of sales effort into winning a very large building over to their information service, all to get less than $10,000 per year in revenue. Not to mention the fact that the most likely customers to be interested in a service like this are also the ones most likely to already be running an efficient building, so the potential savings are probably less for the otherwise early adopters. And don't forget there's a very sizable portion of the market that just won't care, either because they have tenants who pay the energy bills, or because they simply can't be bothered. Alex preaches in his post that the vendor must bring their costs down in order to make their margins at that level. But even if the margins as a percentage of sales are nice, how difficult will it be to add them up to something attractive in the aggregate?

Don't get me wrong, that commercial building energy information service (CBEIS) can be a very good business to own, and a useful tool for the building owner. But from the venture investor's perspective, it's going to take a long time to scale up a business like that to something that would generate compelling returns, if that's the only service and customer benefit the system offers. Plus, how defensible will it be when other companies increasingly offer the same thing? I talked to one customer who's thinking about dropping one of these CBEIS vendors in favor of a pretty similar interface his utility is now offering for free...

For these reasons I increasingly think about building energy information as being an unimpressive investment opportunity by itself. But I also think of it as being a critical enabler for significant additional services and products that can be then offered to the building owner, made possible thanks to the availability of the information. I'm not that interested (as an investor, at least) in one of the cool-looking "home energy displays" that are being offered out there. But if it was a loss leader to pull people into a social networking/ online shopping play based around communities of energy-conscious consumers, that might be potentially interesting. And I bet Comverge and EnerNOC would be very interested in a residential energy information company that offered such a display but ALSO cost-effectively enabled the homeowner to participate more easily and effectively in a demand response program, via integrated controls and an easy integration into as many enabled devices as possible inside the home.

And turning the information into action is really the key. Automation is what will drive savings in these fragmented building energy efficiency markets. And it's also what's going to make new energy efficient equipment be more attractive to customers, because automation will be what allows the customer to take full advantage of the efficiency-generating features of the new equipment. A challenge for new types of equipment is that customers aren't used to doing the new activities they can do with it, but that are what drive the efficiency gains. Automation solves that.

Obviously that's a specific story I'm more than happy to share. But I hope it serves as a good illustration of my bigger point. If all Digital Lumens was doing was gathering information about lighting and sharing that information with the building owner, would these savings result? No. But with the embedded intelligence and automation included in the system, such information allows the building owner to set up the settings for the system and drive some really serious savings.

THAT'S an energy efficiency story that's scalable. So for energy efficiency entrepreneurs, the lesson is this: Don't just show your customers what their energy situation is. And don't just show them what they could do to improve their energy situation. Actually do it for them, in as automated and low-cost a way as possible. Yes, that's incredibly more difficult to pull off. But that's what it will take to start having some dramatic market impact.

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About Cleantech Investing:

Rob Day is a Partner with Black Coral Capital, based in Boston. He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors. The views expressed on this blog are those of Rob, not necessarily the views of any of his colleagues and affiliated organizations. Contact Rob at .(JavaScript must be enabled to view this email address).

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